There are currently auditors at the firm right now conducting audits on the hedge fund’s financial statement. One of the portfolio only trades CDS… how would these auditors know how to valuate CDS contracts… even I have trouble calculating these after reading the level 2 derivatives section…
get a quote from dealer as backup… the auditors will have no idea what it means or how to translate but you need to cover your own butt. we had backup for EVERYTHING. we were convert shop, and the auditors would look at market prices, some converts would only trace/trade once a week/month etc… this is where the auditors always would make a huge fuss, if they saw a trade from 3 weeks ago, and we were marked lower/higher… we had dealer backup, the auditors don’t even know what a conversion ratio is in a convertible bond, much less how to dollar nuke… imagine an american call option on a stock with strike 15 and traded at .90 3 weeks ago, now the stock is $19.23 and you mark at $4.30, the auditors go ape $hit on you everytime.
Auditors will price a lot of these securities on their Bloomberg terminals too. I worked in the Caymans auditing funds for a while and spent many long hours on the old terminal.
bhill020 Wrote: ------------------------------------------------------- > Auditors will price a lot of these securities on > their Bloomberg terminals too. I worked in the > Caymans auditing funds for a while and spent many > long hours on the old terminal. I used to work in audit, and this is what I did. For some of the complext stuff (structured finance stuff) and certain exotics, firms usually have a quant group, just send it over to them and they do the work.
ConvertArb Wrote: ------------------------------------------------------- > get a quote from dealer as backup… the auditors > will have no idea what it means or how to > translate but you need to cover your own butt. we > had backup for EVERYTHING. we were convert shop, > and the auditors would look at market prices, some > converts would only trace/trade once a week/month > etc… this is where the auditors always would make > a huge fuss, if they saw a trade from 3 weeks ago, > and we were marked lower/higher… we had dealer > backup, the auditors don’t even know what a > conversion ratio is in a convertible bond, much > less how to dollar nuke… > > imagine an american call option on a stock with > strike 15 and traded at .90 3 weeks ago, now the > stock is $19.23 and you mark at $4.30, the > auditors go ape $hit on you everytime. Oh and technically speaking, you cant use dealer quotes for back-up for valuation. Not a very robust/reliable source for valuation evidence. You should find some independent thrid party or internal (i.e. your own pricing model)